TY - JOUR
AU - Frankel,Jeffrey A.
AU - Engel,Charles
TI - Do Asset-Demand Functions Optimize over the Mean and Variance of Real Returns? A Six-Currency Test
JF - National Bureau of Economic Research Working Paper Series
VL - No. 1051
PY - 1985
Y2 - March 1985
UR - http://www.nber.org/papers/w1051
L1 - http://www.nber.org/papers/w1051.pdf
N1 - Author contact info:
Jeffrey A. Frankel
Harvard Kennedy School
Harvard University
79 JFK Street
Cambridge, MA 02138
Tel: 617/496-3834
Fax: 617/496-5747
E-Mail: jeffrey_frankel@harvard.edu
Charles Engel
Department of Economics
University of Wisconsin
1180 Observatory Drive
Madison, WI 53706-1393
Tel: 608/262-3697
Fax: 608/262-2033
E-Mail: cengel@ssc.wisc.edu
AB - International asset demands are functions of expected returns.Optimal portfolio theory tells us that the coefficients in this relationship depend on the variance-covariance matrix of real returns.But previous estimates of the optimal portfolio (1) assume expected returns constant and (2) are not set up to test the hypothesis of mean-variance optimization. We use maximum likelihood estimation to impose a constraint between the coefficients and the error variance-covariance matrix. For a portfolio of six currencies, we are able statistically to reject the constraint. Evidently investors are either not sophisticated enough to maximize a function of the mean and variance of end-of-period wealth, or else are too sophisticated to do so.
ER -